240. But given that situation what steps are
you taking to try to minimise the conflict of interest, or potential
conflict of interest?
(Mr Byers) The firms involved make it very clear the
basis on which they are providing advice, and it is on the basis
they are advising a Secretary of State in this particular case
or a particular organisation. It will be a separate group of people
within the organisation who will be providing that advice.

241. So you do not share my concern?
(Mr Byers) I think it is unfortunate there is such
a small number, because there will be a public perception, whether
it is true or not, that somehow information is going from one
side to another within the organisation. As I say, when people
look at those who are advising Transport for London and
the Mayor they will see some of those people are also advising
on the PPP, and I am afraid it is a fact that we only have a very
small number of accountancy firms which do this sort of business.

Chairman

242. So you have not asked, for example, for
a written undertaking from them that there will be no conflict
of interest?
(Mr Byers) Certainly as far as Ernst & Young were
concerned, the team who were doing the work, they were very clear
there was not a conflict of interest.

243. Forgive me, lots of us can be quite clear
as to what we are doing but it is worrying, given you accept there
is such a limited pool from which these people can be drawn, there
is not a written undertaking that there will be no conflict of
interest and no personnel will be employed on different schemes
where there can be any conceivable overlap.
(Mr Byers) I am sure it is part of the agreement which
will be entered into when the contract is let, but let me double-check
on that and let you know, Chairman.

Chairman: That is very kind.

Mr Donohoe

244. Secretary of State, we were very encouraged
when you made the announcement to this Committee that you were
going to re-examine the whole question of the way you were going
to construct the plans for London Underground. I have to say I
was rather disappointed by what you told Parliament, where you
almost suggested there was no meaningful alternative to the PPP.
I just wonder in those circumstances, did you ever have a Plan
B?
(Mr Byers) Yes, and Plan B was to hand the Tube over
to the Mayor and Transport for London.

245. How closely was that examined? It is almost
unbelievable, sitting here listening to evidence which is almost
the direct opposite of the evidence we read. It is almost as though
you are playing a game of poker which is not going to end, because
you never know what the result is going to be in terms of a real
examination of the alternatives. Mr Kiley told this Committee
last week that he had provisional backing from the banks for up
to £3 billion in loans, does that not suggest he did have
and does have a credible alternative?
(Mr Byers) The Ernst & Young Report, because I
asked them to do it, looked very carefully at the financing through
an issue of bonds. I did that because, as I think I may have said
to the Select Committee when I gave evidence before, I took the
view that whilst clearly we would have the public sector comparator
drawn up, if we were simply comparing PPP with that then most
people would say, "Actually you are not comparing it with
what the real alternative might have been", which is the
model promoted by both the Mayor and the Commissioner, which is
financing by way of a bond issue. So the Ernst & Young Report
looks at a bond issue as well. It is true to say that in certain
situations it is a very close call between the modernisation Public-Private
Partnership and the value for money from a bond issue. So we did
look very carefully at that. What I would say is that the £3
billion of funding that the Commissioner may have secured would
not gain the sorts of improvements we are likely to see as a result
of the £16 billion that we expect to be invested over 15
years.

246. Given there were obvious constraints on
those consultants who we had giving evidence, which very clearly
suggested to me at any rate that the parameters in which they
worked were so narrow they were not in a position to fairly judge
the alternatives, if you look at it on the basis I did and on
the basis of being politically sound, surely, given the resistance
there is to the proposal of the Government, you should have erred
on the side of Mr Kiley's submission rather than the alternative?
(Mr Byers) I think it is important to be impartial
and judge accordingly, which I would like to think is what I did
when I had to consider whether or not value for money would be
achieved by the Public-Private Partnership. That was the judgment
I had to take. I took the view, taking into account all of the
issues, that as things stood value for money would be achieved.
It was not an easy decision; on some of the assumptions, some
of the scenarios, it was a very close call. But I felt on balance
value for money would be achieved.

247. From what Mr Kiley said to us last week,
to me at any rate, it looked as though he was going to be investing,
he was going to have the whole stock revamped, renewed, within
a very short period of time, and in actual fact the PPP is not
going to deliver anything like that. That is what I worry about,
the delivery of the service as far as the public is concerned.
If he continues to make statements as he is, and it is against
the background they are not being challenged by you, I am very
clearly of the view we have the worst of the two options. Nothing
which has been said is convincing me, and I would argue perhaps
this Committee, that in actual fact we are getting value for money
and we are going to deliver a reasonable Underground in London
in the period that you suggest. There has been no argument to
that effect that is overwhelming.
(Mr Byers) I know the allegation or the assertion
which has been made by both the Mayor and by Bob Kiley that under
the PPP proposals there will be hardly any investment and no improvements
before 2010. That is the period they have chosen, and I think
that may have been the basis upon which comments have been made.
I think it is worth stressing the point that in the period up
to 2010 there will be £1 billion every year going in by way
of investment. If I can just explain to the Committee what that
will be spent on: around 40 per cent of that, so £400 million
a year, will go on maintenance, and better maintenance means better
reliability and less delays, and we have calculated that by 2010
the number of hours of delays to Tube passengers will be cut by
a third, and that means passengers will save around half a million
hours of delays each year, so that is a real improvement which
will be made. If I can just say where the rest of the money will
go: 60 per cent of it, £600 million, will be spent on major
capital investments, and the sorts of improvements we will get
from thatand I just give the example of the Jubilee Line
because it is important to get this on the recordon the
Jubilee Line all trains will be one carriage longer, which means
16 per cent more seats, there will be 12 extra trains and, together
with the new signalling system which will be introduced, overall
capacity on the Jubilee Line will be increased by 22 per cent
by 2010. These are real improvements and real investment which
will be going in between now and 2010.

248. The problem for us all who use the Underground
is that that has not been sold; you have not sold it. If there
were to be tomorrow a referendum of the travelling public on the
London Underground system, and you have put your point of view
and Bob Kiley has put his point of view, Bob Kiley would win hands
down.
(Mr Byers) The problem I have is that I have to take
a judgment and it would be wrong for me to

Mr Donohoe: Am I right

Chairman

249. I want to come back to something the Secretary
of State has said. I have the terms of reference here of the Ernst
& Young Inquiry. There is no reference in this at all, absolutely
no mention anywhere, of the Transport for London scheme.
You did not ask them to look at it. Indeed the evidence Mr Kiley
gave did not refer to the bond scheme.
(Mr Byers) I think you will find, Chairman, that the
Report from Ernst & Young to myself did look at the relative
costs of a bond financing arrangement.

250. You did not ask them to do that, did you?
(Mr Byers) But they did it.

251. It is not at all in their terms of reference.
Norand forgive me because you have quoted it as though
you looked at what Mr Kiley was pointing out as an alternativewere
they talking about a similar scheme at all.
(Mr Byers) The bond financing arrangement was in the
Ernst & Young Report to me because I specifically asked them
to do it. That may have happened after the terms of reference
were drawn up but it is within the Report. The Report is on the
public record, if you look at the website you can look at it very
quicklyan adviser is whispering madly there and he probably
has a different point of viewand a bond financing arrangement
was looked at.

252. But Mr Kiley is not suggesting that bond
financing is the alternative.
(Mr Byers) The alternative that was mooted by the
Mayor was the one that we looked at, because I thought that was
the right one.

253. He also said he could produce in a very
much shorter time many more trains than 12, and he quoted his
experience of having taken over New York Underground, with a very
much worse system, in a very much more dilapidated state.
(Mr Byers) On the comment about 12 trains, it is interesting
that the period 2010 has been deliberately chosen, because if
we go to 2011 we will suddenly find that we get a large number
of new trains coming on, with 92 new trains on the Piccadilly
Line, for example. The issue is this, Chairman, that if you look
at the London Underground, what are the priorities? Is it putting
new rolling stock on the Underground, or is it sorting out the
track and signals? What we have on the London Underground in many
parts is a Victorian system or an Edwardian system, and what it
desperately needs is not new rolling stock; what it needs is new
signals and new track to make a real difference, and that is what
will come through the Public-Private Partnership. 60 per cent
of it is capital investment, so £600 million a year going
into things like track and signals.

Chris Grayling

254. Secretary of State, you referred to the
Jubilee Line extended trains and so forth. Can I refer you to
page 24 of the document The Background Analysis to the 10 Year
Plan, where you say, "An east-west rail link, such as CrossRail,
will be the crucial element in providing crowding relief to east-west
Underground lines (Central, Jubilee, District, Circle, Metropolitan).
Our modelling suggests that, without it, most east-west lines
on the Underground would be more crowded than today, despite other
improvements." Do you still stand by that statement?
(Mr Byers) I think that what has happened is that
this is a good example of the 10 Year Plan not being in tablets
of stone, which is the point I made at the beginning of my evidence,
which is that during ten years things will change. When the 10
Year Plan was brought up, as the hon. Member will know, we did
not know the contents of the Public-Private Partnership contracts,
and what has happened is that priority is being given, in terms
of improved capacity, to those lines which have those problems
at the present time. That is what we are doing. So it is a ten-year
plan, and when we report in July we will be able to reflect on
the changes which have taken place since the Plan was first published,
compared with the situation that we then have in the middle of
2002.

255. Can I ask you, did Sir Malcolm Bates write
to you on 6 February to warn you that key contract terms were
not final, and that publication of the Ernst & Young report
would damage the public sector's interest during the remainder
of the consultation? Do you recall, you made your statement to
the House of Commons on 7 February? Did he not write that letter
to you?
(Mr Byers) I was very clear, and I think I gave a
commitment to this Committee, that I would publish the Ernst &
Young report. I took the view that there was nothing in the Ernst
& Young report which would compromise the negotiations that
Sir Malcolm Bates was involved in. It is true to say that the
contracts have not absolutely been finalised yet, because there
is consultation going on, but I also said in my statement on 7
February that if there was any material change which meant that
they became no longer value for money, then we would not proceed.

256. But did Sir Malcolm advise you on 6 February,
when you received that letter, which presumably was on 7 February,
that key contract terms had not been finalised?
(Mr Byers) We were always clear that the situation
was that contracts had not been finalised, which is why I then
said to the House that if there were any material changes, then
we would have to review the situation. That has always been the
case, because it would be wrong, bearing in mind that we were
about to begin a period of consultation, if contracts had been
finalised and had been signed up to, because that would make consultation
a sham.

257. But it is clear, you do agree, therefore,
that you made that statement against the wishes of London Underground?
(Mr Byers) I was very clear, and, as I said, I gave
a commitment to this Committee, that we would be open about this
process, and the consultation is only effective if people have
all the material information available to them. That is what is
happening. We have a situation where there is commercially confidential
information which is provided in the bid room, to which Transport
for London and their advisers have access. That is part
of the consultation process. It is one of the reason why this
House, when it came to the consultation, said the consultation
should be with the Mayor and Transport for London, because
the view was that they would respect commercial confidentiality,
they could see the detail in the documents, which is what they
are able to do, and they will be able to respond to the consultation
process.

258. Secretary of State, at a time when your
leadership abilities are very much in question, given the chaos
in your Department, how can it be right and proper for somebody
in your position to overrule the express wishes of London Underground
and publish a statement which they expressly said will be contrary
to the public interest and will affect the negotiations they are
having with the private sector companies involved? How can that
be the right thing to do?
(Mr Byers) I have responsibilities to this House.

259. Then can I ask you, Secretary of State,
what return on equity are the PPP companies going to be receiving?
(Mr Byers) The return on equity will be nothing like
the 35 per cent that the Mayor has repeatedly claimed. In fact
the shareholders' rate of return is in the range of 15 to 20 per
cent. This is the post-tax figure for the shareholders' return
on equity and shareholder loansin other words, how much
money they actually get back for the money they put inand
this range is consistent with the expected rate of return to other
major PFIs like road PFIs where the rate of return is around 15
per cent. So I have answered the question, which has slightly
taken the wind out of your sails!